SBA Proposed Rulemaking:
Federal Contracting Set Asides for
Woman-Owned Small Businesses

Analysis and Commentary by Tim Fay
Fay Communications, Inc.
Jan. 21, 2008

 SBA Proposes Rule for Women-Owned Small Business Set Asides

Something for Everyone to Hate.  Or Not.

          The U.S. Small Business Administration issued a proposed rulemaking regarding Women Owned Small Businesses (WOSBs) on December 20, 2007.  The public may submit comments up until March 31, 2008.  Comments may be submitted to the SBA at this LINK.

          The proposed regulation, as published in the Federal Register, may be downloaded from the this LINK.

          The new SBA rule for WOSBs is modeled in significant part upon the long-standing SBA 8(a) set aside program which gives government contracting preference to minority business owners.  Many of the size standards and net worth standards for WOSBs in this rule are the same as those for 8(a) firms.

Brief Legislative History:

          On December 20, 2007 the U.S. Small Business Administration issued its proposed rule for federal contracting set asides for WOSBs.

          Seven years ago in December 2000 the U.S. Congress enacted a law directing the U.S. Small Business Administration to establish government-wide contracting goals for WOSBs.  This directive was part of "The Small Business Reauthorization Act" and became Public Law 106-554.  Women's business organizations have been frustrated that it has taken the SBA seven years to issue a final rule.  Now that the proposed rule has been published, these same organizations are angry that the rule allows set asides for WOSBs only in extremely limited circumstances.

          In fairness to the SBA it should be noted that in passing the 2000 Act the U.S. Congress delegated to SBA an enormously complex assignment which required SBA to navigate the current legal and constitutional issues surrounding race or gender set asides.  In previous years Congress itself has taken it upon itself to make a legislative finding of discrimination as the justification for race or gender based set asides.  For whatever reason this time around Congress delegated this task to the SBA.

          Furthermore, in the many years since the enactment of other set aside programs for various minority groups, the U.S. Supreme Court has issued a series of definitive, precedent setting decisions which substantially raised the bar for: (a) proving the existence of contracting discrimination based on race or gender, and (b) for imposing constitutionally problematic race or gender based set asides as the solution to such discrimination.

Summary of SBA's Proposed Rule for WOSBs:

          In essence, SBA's proposed rule establishes six tests, or hurdles, which each federal agency must meet in order to reserve a contract for a WOSB.  These six tests are:

Test 1:   The proposed rule allows federal contracting agencies to set aside 5% of their contracts for WOSBs only in industries where SBA has determined that WOSBs are underrepresented or substantially underrepresented.  This determination will be made on an ongoing basis by SBA.  As of publication of this proposed rule SBA has found underrepresentation or substantial underrepresentation of WOSBs only in the following four industries:

• National Security and International Affairs (NAICS code 9281)

• Coating, Engraving, Heat Treating, and Allied Activities (NAICS code 3328)

• Household and Institutional Furniture and Kitchen Cabinet Manufacturing (NAICS code 3371)

• Other Motor Vehicle Dealers (NAICS code 4412)

Test 2:  A contract may not be set aside for a WOSB if the work has been set aside as an 8(a) procurement by SBA, or if there is an 8(a) firm currently performing the work. (SBA can choose to waive the 8(a) designation for the work, i.e., re-designate the work as a non-8(a) procurement if, and only if, an 8(a) firm is not currently performing the work.)

Test 3:  The estimated contract price, including options, must be less than $5 million for manufacturing and less than $3 million for all other contracts.

Test 4:  The contracting agency must conduct an appropriate analysis of the agency's procurement history and make a determination of whether there is evidence of relevant gender discrimination in that industry by that agency.  (SBA points out that this analysis is necessary to justify a gender-based restriction on competition under the equal protection requirements of the Due Process Clause of the Fifth Amendment of the Constitution.)

Test 5:  The contracting agency must determine if two or more economically disadvantaged (minority-owned) WOSBs (EDWOSBs) are available, qualified and likely to bid upon the work.   If so, competition for the contract can be restricted (set aside) for an EDWOSB.

Test 6:  If no EDWOSBs are available to bid upon the work, then and only then can the contracting agency set aside the work for a non-minority owned WOSB, but only if it determines that there are two or more WOSBs available, qualified, and likely to bid upon the work.

Political Party Differences:

          Conservatives and liberals alike have reasons both to celebrate and to complain about this proposed new rule.

          Political conservatives will probably celebrate the fact that SBA's proposed regulation is very limited in scope (as mandated by a series of Supreme Court rulings), and effectively makes it difficult for a federal contracting officer to set aside federal contracts based in any part upon the gender of the business owner.

          Political liberals will probably celebrate the fact that they have won a set aside for a putative "underrepresented group" of federal contractors, WOSBs, which may increase business opportunities for this group.

          Conservatives will also celebrate the fact that SBA's proposed new rule pays legal homage to the Supreme Court decisions which collectively established a principle of "strict scrutiny" regarding race or gender based contracting preferences.

          These Supreme Court decisions essentially said that race or gender based set asides are only to be used as a last resort to correct "historic discrimination" against "underrepresented groups", and that race neutral and gender neutral efforts to correct for that prior discrimination must first be exhausted prior to imposing more legally and constitutionally problematic race or gender based preferences.

          These same court rulings also set a very high bar for proving that discrimination is the reason for any existing underrepresentation.  This is a significant part of the reason that it was so difficult, and that it took so long, for SBA to craft a new rule for WOSBs.

          On the other hand, conservatives will complain that the feds should get out of the business of awarding contracting opportunities based in any part upon the race or gender of the business owner.   Conservatives will tend to argue that race neutral and gender neutral outreach and assistance efforts, market forces, and adherence to principles of nondiscrimination are sufficient to ensure that WOSBs, as well as all other groups, have an equal opportunity to bid on and competitively win federal contracts.

          Similarly, liberals will complain that the SBA has only found a tiny handful of industries in which WOSBs are underrepresented.

          In the final analysis, the proposed SBA rule provides very little in the way of contract set asides and preferences for WOSBs.   Conservatives believe this is as it should be, while liberals believe that WOSBs should be guaranteed at least 5% of all federal contract awards.  In fact, this past autumn one Congressman submitted an amendment which would have required an 8% set aside for WOSBs.  The amendment was not adopted.

          The SBA contracted with the Rand Corporation to document the degree of underrepresentation of WOSBs in federal contract awards.  In its final report, Rand pointedly noted that underrepresentation per se does not prove the existence of gender discrimination.  In other words, in order to justify the extreme measure of imposing a gender-based set aside there must be a definitive finding that the underrepresentation of WOSBs in federal contracting is due to gender discrimination.

          Also, SBA's proposed rule requires that each federal contracting agency provide proof that WOSBs are, in fact, underrepresented in that agency's contract awards and that the reason for that underrepresentation is gender discrimination.  Liberals will argue that this is burdensome and that it is a disincentive for federal contracting officers to set aside contracts for WOSBs.

Statistical Facts Regarding Set Asides:

          Historically, the biggest federal contract set aside programs have been reserved for racial minorities.  These include the 8(a) program, the Small Disadvantaged Business (SDB) program, and the Historically Underutilized Business Zone (HUBZone) program.  Together these three programs accounted for $42.6 billion or 12.5% of all federal contracts in FY 2006.  It should be noted that 33% of 8(a) program participants are woman-owned, and 30% of HUBZone participants are woman-owned.

Data from SBA's "Federal Procurement System Small Business Goaling Report" FY 2006

*There is currently no statutory set aside for WOSBs.  However, for many years federal agencies have been required to track and report the proportion of contracts their agencies award to WOSBs.

          The small business set aside program is race and gender neutral.  This means that any small business may bid on contracts set aside for small businesses without regard to the race, gender or ethnicity of the owner.  22.8% ($77.7 billion) of all federal contracts were set aside for small businesses in FY 2006.

          Even without the proposed WOSB set aside program, woman-owned businesses are entitled to bid upon -- and do win -- significant contracting opportunities which are shielded from open competition. The woman owned businesses in all of the above set aside programs are also permitted and encouraged to bid upon all federal contracts, including especially the race-neutral small business set aside program.

          In addition, if a woman owned business is certified as an 8(a) firm or as an SDB firm then they are automatically certified as a WOSB for purposes of this proposed rule.

          According to the SBA's own figures, women owned small businesses have enjoyed a steadily increasing percentage of federal contracting dollars. Federal contracts to WOSBs accounted for $11.6 billion in FY 2006 and 3.4 percent of federal procurement, an increase of $1.4 billion or 0.2 percent from FY 2005.

          Currently, SBA's support for WOSBs includes funding or affiliations with Small Business Development Centers (SBDC), Women’s Business Centers (WBC), SCORE, Procurement Technical Access Centers (PTAC), and the Office of Small Disadvantaged Business Utilization (OSDBU) centers within each federal agency. Most OSDBUs have a women's business advocate.

          SBA has implemented other new initiatives to increase small business access to government contracts, which will be advantageous to WOSBs.  In the summer of 2007, a semi-annual Scorecard was instituted to report on federal procuring agencies’ progress toward small business contracting goals, including the 5 percent goal for women-owned small businesses.  At this writing, this 5% goal is purely aspirational, i.e., there is no statutory authority to force federal contracting agencies to award 5% of their contracts to WOSBs.  The exception, of course, lies within those few industries identified by SBA in this rulemaking in which WOSBs are either underrepresented or substantially underrepresented.

Recap:

          The pertinent question is whether a set aside for woman owned small businesses is necessary or desirable.

          There are already literally dozens of federal programs and initiatives designed to help all small businesses compete, including programs specifically targeted toward helping woman owned small businesses.

          In FY 2006 the federal government awarded fully 41.3% of all contracts ($140.7 billion) to small businesses many of which are owed by racial minorities and women. 12.5% of contracts ($42.6 billion) went to firms owned by racial or ethnic minorities, a substantial number of which are owned by women.

          The U.S. Supreme Court has ruled that preferences based in any part upon race, gender or ethnicity must be narrowly tailored, limited in duration, and must be designed to alleviate actual discriminatory practices. Most importantly, under current case law race and gender neutral methods to remedy any discrimination must be exhausted prior to imposing legally and constitutionally problematic race or gender preferences. The purpose of any preference is not to correct underrepresentation but to correct actual discrimination.

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